On Friday, the Florida Southern District Court held a hearing on several dispositive motions in litigation between film studios and popular file-locker Hotfile.

Major film studios — including Disney, 20th Century Fox, Universal City, Columbia Pictures, and Warner Bros. — sued Hotfile in February 2011 for copyright infringement and secondary copyright infringement. The studios also brought a claim against Hotfile’s owner and operator, Anton Titov, for personal liability. In July, the court dismissed the claim for direct copyright infringement but allowed the claims for inducement, contributory infringement, and vicarious liability to go forward. Hotfile raised a number of defenses in its answer to the complaint, notably that it is protected by the DMCA safe harbor, and also brought a counterclaim against Warner Bros., alleging the film studio had made material misrepresentations in thousands of DMCA takedown notices it had sent to Hotfile. Both parties moved for summary judgment earlier this year. 1The studios also seek to strike portions of testimony from several of Hotfile’s expert witnesses and defendant Anton Titov.

Though this is not the first infringement suit against file-lockers — Hotfile itself has been sued several times 2Once by Perfect10 and twiceby Liberty Media Holdings. — it is notable for being one of the first suits initiated by major film studios against a popular file-locker. If the case progresses, it may prove influential in shaping copyright law online.

The claims of the studios are similar to claims in other copyright cases involving online service providers. It is alleged that Hotfile engaged in massive, commercial infringement by actively facilitating the reproduction and distribution of unauthorized TV shows and movies through its service. The studios point to Hotfile’s “affiliate program” that pays users for uploading popular files with the most downloads. Hotfile also operates a referral program that generates income for third-party sites that link to Hotfile content, the result of which, the studios allege, “is that Hotfile effectively partners, and acts in concert, with a vast array of pirate link sites and other affiliates to advertise and promote the infringing content on Hotfile’s servers.” Finally, like Megaupload, Hotfile is alleged to stymie takedowns of infringing content by making multiple copies of every file uploaded, each with a separate link. As the studios state:

Defendants protest that Hotfile is not like Napster, Grokster, Limewire, and other notorious infringers. But the differences make Hotfile’s infringement more egregious, not less. No earlier pirate services had the temerity actually to pay its users to upload infringing content. Hotfile does. Hotfile’s own economist acknowledges that Hotfile’s practice of paying uploaders (Hotfile’s so-called “Affiliates”) based on how many times their files are downloaded induces the uploading of “popular” (i.e., infringing) content. Additionally, unlike previous adjudicated infringers, which facilitated access to content stored on users’ computers, Hotfile itself physically stores all the infringing content on its own servers, giving it an unprecedented ability to stop the infringement – an ability Hotfile chooses not to exercise. Finally, Hotfile’s business model is indistinguishable from that of the website Megaupload, which recently was indicted criminally for engaging in the very same conduct as Hotfile. Defendants even admit that they formed Hotfile “to compete with” Megaupload.

The motions

On motion for summary judgment, the studios argue that Hotfile is ineligible for safe harbor protection because it failed to reasonably implement a repeat infringer policy, it failed to comply with the DMCA agent designation requirements, it had disqualifying knowledge — including actual knowledge of specific infringing files, “red flag” knowledge, and willful blindness — and it induced infringement.

On the first point, the studios note that Hotfile had the ability to track the number of takedown notices that individual users were responsible for (“strikes”), but it took no steps to terminate repeat infringers — a number of individual uploaders had accumulated over three hundred strikes without being terminated. The studios also note that over half of all downloads on Hotfile come from files uploaded by users with three or more strikes.

The last point, concerning the lack of knowledge requirement for safe harbor protection, has been the subject of recent court decisions in Viacom v. YouTube, from the Second Circuit, and UMG v. Veoh, from the Ninth. 3Note that the 9th Circuit ordered more briefing in Veoh this past June, following the decision in Viacom. Thus, the decision may yet be amended; the court also has a petition for rehearing on the case pending. It appears that this is the first time a court in the Eleventh Circuit has been confronted with interpreting these provisions of the DMCA. This portion of the DMCA states that a service provider is only eligible for safe harbor protection if it “does not have actual knowledge that the material or an activity using the material on the system or network is infringing,” or “in the absence of such actual knowledge, is not aware of facts or circumstances from which infringing activity is apparent.” The above cases focused primarily on the scope of the latter, so-called “red flag” knowledge.

Here, the studios point to several “red flags” that should have made Hotfile aware of infringement: over 90% of downloads were infringing, the operators received a “constant stream of communications” from users who said they were downloading infringing works, thousands of linking sites associated with Hotfile contained terms like “pirate” or “warez” that indicated obvious infringement, and, perhaps most brazenly, Hotfile’s tutorials for using its service used names and titles of copyrighted works as examples.

But the court may not need to dive into the scope of “red flag” awareness just yet; the studios have also provided evidence that Hotfile had actual knowledge of specific infringing works.

Without the safe harbor, the studios argue that Hotfile is liable for contributory copyright infringement, vicarious liability, and inducement. These arguments are fairly straight-forward applications of these doctrines of secondary liability. For contributory infringement, Hotfile provided the “site and facilities” for infringement and had reason to know about such infringement. For vicarious liability, Hotfile financially benefited from infringement through its premium subscriptions while declining its ability to stop or limit infringment.

The inducement claim — “active steps . . . taken to encourage direct infringement” — tracks the Supreme Court’s Grokster opinion and “parallels the pattern of prior adjudicated infringers,” according to the studios. They allege that Hotfile’s unlawful objective is apparent from its Affilliate program, which pays users to upload popular, and predictably copyrighted, files. Hotfile also directly targets a user base of infringers, refuses to terminate repeat infringers, is overwhelmingly used only for infringement, and depends on infringement for its business model. Finally, the defendants have helped users to infringe, have impeded efforts by copyright holders to mitigate infringement, and have refused to even consider technology that could be used to prevent infringement.

Hotfile’s response to the studios’ motion for summary judgment essentially refutes their characterization of the facts — it didn’t induce infringement, it did reasonably implement a repeat infringer policy, etc. 4Hotfile has also moved for partial summary judgment on the claim that it is protected by the DMCA safe harbor for any infringement that occurred after February 11, 2011 — ten days after it was sued by the studios. To be sure, the court must sift through a lot of facts to resolve the issues raised on these motions. To succeed at the summary judgment stage, a party must show that, when all the facts are viewed in the light most favorable to the opposing party, no genuine issue of material facts exist, and the moving party is entitled to judgment as a matter of law on the issues it raises in its motion. With such complex legal issues, and thousands of pages of evidence already in front of it, the court here has its work cut out for it.

Other issues to watch

In the meantime, there are a few other legal issues raised in this litigation that are worth watching.

First, does inducement disqualify a service provider from DMCA safe harbor protection? A number of other courts have taken this position. 5See Viacom v YouTube, 676 F.3d 19, 38 (2nd Cir. 2012) (“inducement of copyright infringement … which ‘premises liability on purposeful, culpable expression and conduct,’ … might also rise to the level of control under § 512(c)(1)(B)”); Columbia Pictures v Fung, cv 06-5578-SVW, Order Granting Plaintiffs’ Motion for Summary Judgment on Liability (CD Cali. 2009) (“inducement liability and the Digital Millennium Copyright Act safe harbors are inherently contradictory”); Arista Records v Usenet.com, 633 F. Supp. 2d 124, 142 SDNY 2009 (if defendants “encouraged or fostered such infringement, they would be ineligible for the DMCA’s safe harbor provisions”). The language and legislative history of the statute certainly seem to suggest that active conduct to encourage infringement is incompatible with a safe harbor for passive conduct, but courts in the Eleventh Circuit have yet to weigh in on the issue, as far as I can tell.

Next, what is the role of willful blindness in the knowledge prong of the DMCA safe harbor? The studios make the claim that Hotfile acted with willful blindness, effectively admitting “that they sought to blind themselves to the infringement all around them as much as possible.” Willful blindness, defined by the Supreme Court as taking “deliberate actions to avoid confirming a high probability of wrongdoing,” has long been considered a form of knowledge. The twist is that the DMCA provides that safe harbor protection does not require “a service provider monitoring its service or affirmatively seeking facts indicating infringing activity, except to the extent consistent with a standard technical measure complying with the provisions of subsection (i).” The Second Circuit in Viacom v. YouTube confronted this question and concluded that the DMCA “limits—but does not abrogate— the doctrine” of willful blindness, and it “may be applied, in appropriate circumstances, to demonstrate knowledge or awareness of specific instances of infringement under the DMCA.”

Finally, on a bit of a side note, the movie studios also argue that Hotfile is ineligible for the 512(c) safe harbor — which limits remedies “for infringement of copyright by reason of the storage at the direction of a user” — because Hotfile’s service was not used primarily for “storage.” They note that a significant portion of registered users on the site only use it to download, not upload, files. More to the point, Hotfile routinely deletes files that have never been downloaded — the “antithesis” of storage, as the studios put it. I don’t recall seeing this argument raised before in another case, so it will be interesting to see how the court approaches it.

A trial is currently scheduled for early November, but it shouldn’t be a surprise if the court’s eventual decision on these motions is appealed to the Eleventh Circuit, delaying trial.

Note that the 9th Circuit ordered more briefing in Veoh this past June, following the decision in Viacom. Thus, the decision may yet be amended; the court also has a petition for rehearing on the case pending.

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Hotfile has also moved for partial summary judgment on the claim that it is protected by the DMCA safe harbor for any infringement that occurred after February 11, 2011 — ten days after it was sued by the studios.

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Copyhype provides news and info on current developments relating to copyright law, the media industries, and the digital economy. It cuts through the hype to bring reasoned discussion aimed at both legal and nonlegal audiences.

Terry Hart is currently VP Legal Policy and Copyright Counsel at the Copyright Alliance. Any opinions expressed on this site remain his own and not necessarily those of his present or any past employers.